Tesco prepares to exit loss-making US chain

Tesco would probably leave the US after announcing a review of its Fresh & Easy unit in the country and the departure of the unprofitable business’s head, the UK supermarket giant said yesterday.

All options were being considered for the US chain and investment bank Greenhill had been hired to assist with the review, Tesco said as it reported that a sales decline resumed in the UK in the third quarter.

Some analysts have questioned the viability of Fresh & Easy, in which Tesco has invested £1 billion (R14bn) and which has not made a profit since it was formed in 2007.

Fixing the California-based business has been a distraction for chief executive Philip Clarke as he seeks to halt sliding sales in the retailer’s domestic market.

“It will be a good relief to withdraw,” CA Cheuvreux analyst Arnaud Joly said. He has an underperform recommendation on the stock.

Approaches had been made for all and part of the Fresh & Easy business in recent months, Tesco said. It had also been contacted by potential partners interested in developing the business, the firm said.

The interest was likely to be local, rather than from any of the major international retailers, Joly said.

Tim Mason, who had led the unit since its creation in 2007, left yesterday after 30 years at Tesco, the company said.

“It is now clear that Fresh & Easy will not deliver acceptable shareholder returns on an appropriate timeframe in its current form,” Tesco said in a statement.

Same-store sales at the unit rose 1.8 percent in the third quarter. That was worse than the previous quarter’s 6.9 percent growth. US growth had slowed to a trickle, Clarke said.

“It was a discount store and it had high costs and it just proved too difficult to shift people from their traditional buying habits in big supercentres and supermarkets into a small store,” the chief executive said.

Fresh & Easy’s loss narrowed by 1.4 percent to £74 million in the first half of Tesco’s financial year.

In April, Clarke pushed back a goal for the business to reach breakeven until financial 2013 and vowed to slow store openings and focus on getting each store to profitability.

“While the business has many positives, its journey to scale and acceptable returns will simply take too long relative to other opportunities.”

Tesco said sales at UK stores open at least a year fell 0.6 percent, excluding petrol and VAT, in the 13 weeks to November 24.

Same-store revenue gained 0.1 percent in the quarter before, snapping a sequence of six consecutive declines.

The drop in UK sales is another setback for Clarke, who is investing £1bn to upgrade the stores, add new products and hire staff. – Bloomberg